-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, V8p9W+4nfFnnACY2SR7Yk/amm1/Aizm91AVuYKEeQEbGAgfLATyyPaM5eK2R5JVP ZQw0hFaob8AvnuA7D1uaiQ== 0000812796-97-000020.txt : 19971211 0000812796-97-000020.hdr.sgml : 19971211 ACCESSION NUMBER: 0000812796-97-000020 CONFORMED SUBMISSION TYPE: 10QSB/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971210 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ENDOREX CORP CENTRAL INDEX KEY: 0000812796 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 411505029 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10QSB/A SEC ACT: SEC FILE NUMBER: 000-16929 FILM NUMBER: 97735245 BUSINESS ADDRESS: STREET 1: 3233 15TH STREET SOUTH CITY: FARGO STATE: ND ZIP: 58104 BUSINESS PHONE: 7012329575 MAIL ADDRESS: STREET 1: 3233 15TH STREET SOUTH CITY: FARGO STATE: ND ZIP: 58104 FORMER COMPANY: FORMER CONFORMED NAME: IMMUNOTHERAPEUTICS INC DATE OF NAME CHANGE: 19920703 10QSB/A 1 FORM 10-QSB/A AMENDMENT #1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the Quarter Ended September 30, 1997 ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from ____________ to ____________ Commission File No. 0-11572 Endorex Corp. (Exact name of registrant as specified in its charter) Delaware 41-1505029 (State of other jurisdiction of (I.R.S. Employer Identification incorporation or organization) Number) 900 North Shore Drive Lake Bluff, IL 60044 (Address of principal executive offices) (Zip Code) Issuer's telephone number, including area code (847) 604-7555 (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] At November 5, 1997, 9,736,641 shares of the registrant's common stock (par value, $.001 per share) were outstanding. PART I. ITEM 1 - Financial Statements ENDOREX CORPORATION (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED BALANCE SHEET (UNAUDITED)
September 30, 1997 ASSETS Current assets: Cash and cash equivalents $ 800,707 Prepaid Expenses 131,527 ------------ TOTAL CURRENT ASSETS 932,234 Leasehold improvements and equipment, net of accumulated amortization of $916,277. 99,019 Patent issuance costs, net of accumulated amortization of $36,300. 260,382 ------------ TOTAL ASSETS $ 1,291,635 ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 252,988 ------------ STOCKHOLDERS' EQUITY: Preferred stock, $.05 par value. Authorized 100,000 shares; none issued and outstanding -- Common stock, $.001 par value. Authorized 50,000,000 shares; issued 2,071,432; outstanding 1,952,790 2,071 Additional paid-in capital 13,527,230 (Deficit) accumulated during the development stage (12,046,904) ------------ 1,482,397 Less: Treasury Stock, at cost, 118,642 shares (443,750) ------------ TOTAL STOCKHOLDERS' EQUITY 1,038,647 ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,291,635 ============ See accompanying condensed notes to financial statements
ENDOREX CORPORATION (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Cumulative from Nine Months February 15, 1985 Ended September 30, (date of inception) 1997 1996 to September 30, 1997 SBIR contract revenue $ -- $ -- $ 100,000 Expenses: SBIR contract research and development -- -- 86,168 Proprietary research and development 1,103,003 775,538 9,152,088 General and administrative 738,889 292,692 3,705,146 ------------ ------------ ------------- Total operating expenses 1,841,892 1,068,230 12,943,402 ------------ ------------ ------------- (Loss) from operations (1,841,892) (1,068,230) (12,843,402) Other income -- -- 1,512 Interest income 19,597 37,302 840,553 Interest expense (4,929) -- (45,567) ------------ ------------ ------------- Net loss $(1,827,224) $(1,030,928) $(12,046,904) ============ ============ ============= Net loss per share $ (1.36) $ (1.83) Weighted average common shares outstanding 1,329,322 562,655
See accompanying condensed notes to financial statements ENDOREX CORPORATION (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended September 30, 1997 1996 SBIR contract revenue $ -- $ -- Expenses: SBIR contract research and development -- -- Proprietary research and development 369,006 196,952 General and administrative 226,211 137,979 ----------- ------------ Total operating expenses 595,217 334,931 ----------- ------------ (Loss) from operations (595,217) (334,931) Other income -- -- Interest income 11,648 17,521 Interest expense (4,929) -- ----------- ------------ Net loss $ (588,498) $ (317,410) =========== ============ Net loss per share $ (0.33) $ (0.42) Weighted average common shares outstanding 1,810,230 760,122
See accompanying condensed notes to financial statements ENDOREX CORP. (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Cumulative from Nine months February 15, 1985 ended September 30, (date of inception) 1997 1996 to September 30, 1997 Net cash used in operating activities $(1,773,686) $(1,030,928) $(12,046,904) ------------ ----------- ------------- INVESTING ACTIVITIES: Patent issuance cost (64,945) (19,755) (397,688) Organizational costs incurred -- -- (135) Deposit on leasehold improvements -- -- (5,000) Purchase of leasehold improvements -- -- (414,671) Purchases of office and lab equipment (52,977) (5,219) (606,776) Proceeds from assets sold -- -- 1,000 ----------- ----------- ------------- Net cash used in investing activities (117,922) (24,974) (1,423,270) ----------- ----------- ------------- FINANCING ACTIVITIES: Net proceeds from issuance of common stock 1,746,408 1,324,999 12,666,284 Proceeds from exercise of options -- 132,049 134,236 Proceeds from borrowings from President -- -- 41,433 Repayment of borrowings from President -- -- (41,433) Proceeds from borrowings under line of credit 287,490 -- 587,490 Repayment of borrowings under line of credit (287,490) -- (587,490) Proceeds from note payable to bank -- -- 150,000 Payments on note payable to bank -- -- (150,000) Proceeds from borrowings from stockholders -- -- 15,867 Repayment of borrowings from stockholders -- -- (15,867) Advances from parent Company -- -- 135,000 Payments to Parent company -- -- (135,000) Repayment of long- term note receivable -- -- 50,315 Repayment of note payable issued in exchange for legal service -- -- (71,968) Purchase of treasury stock -- -- (443,750) ----------- ----------- ------------- Net cash provided by financing activities 1,746,408 1,457,048 12,335,117 ----------- ----------- ------------- Net increase (decrease) in cash and cash equivalents (105,200) 547,230 800,707 Cash and cash equivalents at beginning of periods 905,907 1,146,351 -- ----------- ----------- ------------- Cash and cash equivalents at end of periods $ 800,707 $1,603,362 $ 800,707 =========== =========== ============= See accompanying Condensed Notes to Financial Statements
ENDOREX CORP. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS The unaudited interim consolidated financial statements included herein are prepared pursuant to the rules and regulations for reporting on Form 10-QSB. Accordingly, certain information and footnote disclosures normally accompanying the annual financial statements have been omitted. The interim financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's latest annual report on Form 10-KSB. In the opinion of management, the consolidated financial statements include all adjustments necessary for a fair statement of the results operations, financial position and cash flows for the interim periods. All adjustments were of a normally recurring nature. The results of operations for interim periods are not necessarily indicative of the results for the full fiscal year. On January 31, 1997, the Company changed its fiscal year end from January 31 to December 31. The Transition Period resulting from the change was reported in the annual report on Form 10-KSB for the period ended December 31, 1996. On May 19, 1997, the Company entered into a senior line of credit agreement with The Aries Funds, two of its major stockholders, pursuant to which the Company could borrow up to $500,000 (the "Bridge Loan"). The Bridge Loan accrued interest at the rate of 12% per annum and was due and payable on August 19, 1997. In consideration of the Bridge Loan, the Company has granted warrants to purchase an aggregate of 66,668 shares of Common Stock at an initial exercise price equal to the Offering Price of the Company's private placement. The exercise price of such warrants and the number of shares of common stock purchasable thereunder are subject to adjustment in certain circumstances. Such warrants are exercisable from May 19, 1997 until May 19, 2002. On July 18, 1997, the Company paid the outstanding principal and interest on the Bridge Loan. On June 11, 1997, the Company effected a one-for-fifteen reverse stock split of its common stock. All share and per share amounts have been adjusted to reflect such reverse stock split. On July 16, 1997, the Company issued and sold an aggregate of 864,865 shares of Common Stock to The Aries Funds for an aggregate consideration of $2 million. On July 29, 1997, the Company formed Wisconsin Genetics, Inc. ("WGI") a new majority owned subsidiary devoted to the development of new drugs for the prevention and treatment of cancer. On August 13, 1997, the Company's warrants issued in connection with the secondary offering on August 13, 1992 expired. Pursuant to a Private Placement, the Company issued and sold an aggregate of 7,783,851 shares of Common Stock on October 10 and October 16, 1997 to certain accredited investors. The aggregate proceeds of the July 16, October 10 and October 16, 1997 issuances were $20 million and the net proceeds to the Company after deducting commissions and expenses were $17,400,000. In connection with Private Placement, the Company issued warrants to purchase 2,162,162 shares of Common Stock at an exercise price of $2.54375 per share to Paramount Capital, Inc., the Placement Agent. The warrants are exercisable after April 16, 1998 and expire on April 16, 2003. Common stock equivalents are excluded in the computation of primary earnings per share on the face of the Consolidated Statements of Operations because the effect would be anti-dilutive. Fully diluted earnings per share are not disclosed on the face of the Consolidated Statement of Operations because the effect is anti-dilutive. ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Plan of Operation The following "Plan of Operation" provides information which management believes is relevant to an assessment and understanding of the Company's results of operation and financial condition. The discussion should be read in conjunction with the Company's unaudited consolidated interim financial statements and notes thereto and the Company's Annual Report on Form 10-KSB. This report contains certain statements of a forward-looking nature relating to future events or the future financial performance of the Company. Investors are cautioned that such statements are only predictions and that actual events or results may differ materially. In evaluating such statements, investors should carefully consider the various factors identified in this report, which could cause actual results to differ materially from those indicated from such forward-looking statements, including those set forth in Exhibit 99 "Certain Factors that may Effect Future Results, Financial Condition and the Market Price of Securities" of this Quarterly Report on Form 10-QSB. The Company is a development stage enterprise and expects no significant revenue from the sale of products in the near future. The Company's proprietary immunomodulator, ImmTher, has completed some Phase II clinical trials for cancer with limited response in gross metastatic disease and its immuno-adjuvant, Theramide, has completed a Phase I clinical trial for cancer. The Company plans to initiate new Phase II clinical trials for ImmTher in treating micro-metastasis in pediatric sarcomas with two major cancer centers and new preclinical programs as an anti-infective agent in immuno-compromised patients. For Theramide, the Company is completing preclinical data for new Phase I trials as an adjuvant for a vaccine program. Orasomal Technologies, Inc. ("Orasomal"), a majority-owned subsidiary, has initiated preclinical evaluation of at least one new product utilizing its proprietary oral and mucosal delivery system, and plans to expand, during 1997, its oral vaccine program and oral therapeutics program. Orasomal plans to select products for this program that are only available in injectable form and for which oral therapy is not available. Orasomal believes its technology, if effective, will increase patient compliance and ease of administration of therapy and is currently evaluating a range of therapies including insulin, allergens, vaccines and cancer chemotherapy. Orasomal is also evaluating several vaccines of other biotechnology companies in its proprietary delivery system and expects to license its Orasome technology for oral and/or mucosal delivery of other companies' products in the near future. On August 1, 1997, WGI signed an exclusive worldwide license agreement with the Wisconsin Alumni Research Foundation ("WARF"), a non-profit organization dedicated to receive and license new discoveries made by University of Wisconsin-Madison researchers, for the development of a new cancer therapy. The new drug, perillyl alcohol, is completing Phase I human trials sponsored by the National Cancer Institute (NCI) at several cancer centers. WGI plans to initiate NCI-sponsored Phase II trials for breast, prostate and ovarian cancer in the near future. The Company has the option to license another perillyl alcohol analog with WARF. On September 30, 1997 and December 31, 1996, the Company had cash and cash equivalents of $800,707 and $905,907, respectively, and working capital of $679,246 and $824,821, respectively. On October 16, 1997, the Company sold Common Stock which, net of commissions and expenses, raised approx- imately $15.7 million. The Company's current level of research and development activities requires the expenditure of approximately $250,000 per month. The Company may be required to seek additional financing in the future to continue operations during such period in the event of cost overruns, unanticipated expenses, a determination to pursue additional research projects, or the failure to receive funds anticipated from other sources. In addition to the net proceeds from the Offering, the Company will require substantial additional funds to finance its business activities on an ongoing basis. The Company's actual future capital requirements will depend on numerous factors, including, but not limited to, costs associated with technologies and products which it may license from third parties, progress in its research and development programs, including preclinical and clinical trials, costs of filing and prosecuting patent applications and, if necessary, enforcing issued patents or obtaining additional licenses to patents, competing technological and market developments, the cost and timing of regulatory approvals, the ability of the Company to establish collaborative relationships, and the cost of establishing manufacturing, sales and marketing capabilities. The Company has no current commitment to obtain other additional funds and is unable to state the amount or potential source of any other additional funds. Because of the Company's potential long-term capital requirements, it may undertake additional equity offerings whenever conditions are favorable, even if it does not have an immediate need for additional capital at that time. There can be no assurance that the Company will be able to obtain additional funding when needed, or that such funding, if available, will be obtainable on reasonable terms. Any such additional funding may result in significant dilution to existing stockholders. If adequate funds are not available, the Company may be required to accept unfavorable alternatives, including (i) the delay, reduction or elimination of research and development programs, capital expenditures, and marketing and other operating expenses, (ii) arrangements with collaborative partners that may require the Company to relinquish material rights to its products that it would not otherwise relinquish, or (iii) a merger of the Company or a sale of the Company or its assets. In October 1997, the Company completed a private placement of Common Stock with gross proceeds of $20 million. However, the Company may be required to seek additional financing to continue operations in the event of cost overruns, unanticipated expenses, a determination to pursue additional research projects, or failure to receive funds anticipated from other sources. The Company has no current commitment to obtain other additional funds and is unable to state the amount or potential source of any other funds. The Company does not intend to significantly increase employees during the next twelve months, but will recruit some key personnel to accelerate preclinical development of products. The Company uses a number of outside consultants skilled in the area of government regulatory management, clinical trial management, Good Manufacturing Practices ("GMP") and business development. The Company also formed a Scientific Advisory Board for Orasomal and in January appointed as co-chairman Robert Langer, Ph.D., Professor of Biomedical Engineering of M.I.T. and Henry Brem, M.D., Director of Neurosurgical Oncology at Johns Hopkins Hospital. Both individuals are recognized leaders in drug delivery systems. Dr. Langer is a co-inventor of the Orasome(TM) technology currently under development by Orasomal and licensed from M.I.T. WGI is currently assembling s Scientific Advisory Board to be comprised of a select group of oncologists to guide the clinical development of perillyl alcohol. Impact of New Accounting Standards During 1996, the Financial Accounting Standards Board ("FASB")issued a new pronouncement, SFAS No. 128 "Earnings per Share" which is relevant to the Company's operations. The statement is effective for financial statements for both interim and annual periods ending after December 15, 1997. Earlier application is not permitted. The Company intends to adopt SFAS No. 128 at year end 1997 and expects no significant effect on loss per share. During 1997, FASB issued SFAS No. 130 "Reporting Comprehensive Income" and SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information". The Company has not determined the effect of the adoption of these pronouncements. PART II. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS a) The Company's Annual Meeting of Stockholders was held on July 16, 1997. c) The motions before the stockholders were: 1) To elect four directors:
Votes Votes Votes Broker Name of Director For Against Withheld Abstentions Nonvotes Michael S. Rosen 12,217,403 21,331 - - - Gerald J. Vosika, MD 12,221,472 17,262 - - - Steve H. Kanzer, Esq. 12,221,272 17,462 - - - Kenneth F. Tempero, MD 12,221,472 17,262 - - -
2) To ratify the appointment of Coopers & Lybrand L.L.P. as independent public accountants for the year ending December 31, 1997. Votes For: 12,229,277 Votes Against: 5,750 Votes Withheld: - Abstentions: 3,707 Broker Nonvotes: - 3) To ratify a Private Placement of the sale of up to 60 units of the Company's securities for a purchase price of $100,000 per unit. Votes For: 3,702,143 Votes Against: 19,982 Votes Withheld: - Abstentions: 6,017,132 Broker Nonvotes: 2,499,477 ITEM 6 - EXHIBITS AND REPORTS OF FORM 8-K a)Exhibits: 4(i)(c) Warrant for the Purchase of 864,865 shares of Common Stock (1) 4(i)(d) Warrant for the Purchase of 1,297,297 shares of Common Stock (1) 10.13 Placement Agency Agreement between the Registrant and Paramount Capital, Inc. dated July 1, 1997 (1) 10.14 Side Letter #1 to Placement Agency Agreement (1) 10.15 Form of Subscription Agreement for the purchase of Common Stock (1) 10.16 Financial Advisory Agreement between the Registrant and Paramount Capital, Inc. dated October 16, 1997 (1) 27 Financial Data Schedule. 99 Certain Factors that may Effect Future Results, Financial Condition and the Market Price of Securities. (1) Incorporated by reference to the Registrant's Quarterly Report on Form 10-QSB for the quarter ended September 30, 1997. b)Reports on Form 8-K: None. SIGNATURES Pursuant to requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ENDOREX CORP. Michael S. Rosen President and CEO David G. Franckowiak Controller/Treasurer (principal financial officer) EX-27 2 EXHIBIT 27 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS AMMENDED FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENTS OF OPERATION. 9-MOS DEC-31-1996 SEP-30-1997 800,707 0 0 0 0 932,234 99,019 916,277 1,291,635 252,988 0 2,071 0 0 13,527,230 1,038,647 0 0 0 1,841,892 0 0 0 (1,827,224) 0 (1,827,224) 0 0 0 (1,827,224) 0 0
EX-99 3 EXHIBIT 99 Certain Factors that may Effect Future Results, Financial Condition and the Market Price of Securities Need for Substantial Additional Funds, Risk of Insolvency -- The Company may be required to seek additional financing in the future to continue operations during such period in the event of cost overruns, unanticipated expenses, a determination to pursue additional research projects, or the failure to receive funds anticipated from other sources. In addition to the net proceeds from the Offering, the Company will require substantial additional funds to finance its business activities on an ongoing basis. The Company's actual future capital requirements will depend on numerous factors, including, but not limited to, costs associated with technologies and products which it may license from third parties, progress in its research and development programs, including preclinical and clinical trials, costs of filing and prosecuting patent applications and, if necessary, enforcing issued patents or obtaining additional licenses to patents, competing technological and market developments, the cost and timing of regulatory approvals, the ability of the Company to establish collaborative relationships, and the cost of establishing manufacturing, sales and marketing capabilities. The Company has no current commitment to obtain other additional funds and is unable to state the amount or potential source of any other additional funds. Because of the Company's potential long-term capital requirements, it may undertake additional equity offerings whenever conditions are favorable, even if it does not have an immediate need for additional capital at that time. There can be no assurance that the Company will be able to obtain additional funding when needed, or that such funding, if available, will be obtainable on reasonable terms. Any such additional funding may result in significant dilution to existing stockholders. If adequate funds are not available, the Company may be required to accept unfavorable alternatives, including (i) the delay, reduction or elimination of research and development programs, capital expenditures, and marketing and other operating expenses, (ii) arrangements with collaborative partners that may require the Company to relinquish material rights to its products that it would not otherwise relinquish, or (iii) a merger of the Company or a sale of the Company or its assets. See "History of Losses; Going Concern Reports, Uncertainty of Future Financial Results." Early Stage of Development -- The Company is a development stage enterprise and expects no significant revenue from the sale of products in the near future. The Company's proprietary immunomodulator, ImmTher, has completed some Phase II clinical trials for cancer with limited response in gross metastatic disease and its immuno-adjuvant, Theramide, has completed a Phase I clinical trial for cancer. The Company plans to initiate new Phase II clinical trials for ImmTher in treating micro-metastasis in pediatric sarcomas with two major cancer centers and new preclinical programs as an anti-infective agent in immuno-compromised patients. For Theramide, the Company is completing preclinical data for new Phase I trials as an adjuvant for a vaccine program. Additionally, perillyl alcohol is completing several Phase I trials as an anti-cancer drug. The Company's oral drug delivery technology is in the preclinical evaluation stage. As a result, the Company must be evaluated in light of the problems, delays, uncertainties and complications encountered in connection with early-stage biopharmaceutical development. The risks include, but are not limited to, the possibilities that any or all of the Company's potential products will be found to be ineffective or toxic, or fail to receive necessary regulatory clearances in the United States or abroad. To achieve profitable operations, the Company must successfully develop, obtain regulatory approval for, introduce and successfully market through a larger pharmaceutical partner at a profit products that are currently in the research and development phase. The Company is currently not profitable, and no assurance can be given that the Company's research and development efforts will be successful, that required regulatory approvals will be obtained, that any of the Company's proposed products will be safe and effective, that any such products, if developed and introduced, will be successfully marketed or achieve market acceptance, or that such products can be marketed at prices that will allow profitability to be achieved or sustained. Failure of the Company to successfully develop, obtain regulatory approval for, introduce and market its products under development would have a material adverse effect on the business, financial condition and results of operations of the Company. History of Losses; Going Concern Reports; Uncertainty of Future Financial Results -- The Company has experienced significant operating losses since its inception, and expects to incur losses for the next several years. As of December 31, 1996, the Company's accumulated deficit was $10,219,680. The Company's independent auditors have included an explanatory paragraph in their report on the Company's financial statements at December 31, 1996, which paragraph expresses substantial doubt concerning the Company's ability to continue as a going concern. The amount of net losses may vary significantly from year-to-year and quarter-to-quarter and depend on, among other factors, the success of the Company in securing collaborative partners and the progress of research and preclinical and clinical development programs. The Company's ability to attain profitability will depend, among other things, on its successfully completing development of its product candidates, obtaining regulatory approvals, establishing manufacturing, sales and marketing capabilities and obtaining sufficient funds to finance its activities. There can be no assurance that the Company will be able to achieve profitability or that profitability, if achieved, can be sustained. Limited Experience and Dependence on Third Parties for Completion of Clinical Trials, Manufacturing and Marketing -- The Company has no experience with receipt of government approvals or marketing pharmaceutical products and has limited experience with clinical testing and manufacturing. The Company may seek to form alliances with established pharmaceutical companies for the testing, manufacturing and marketing of, and pursuit of regulatory approval for, its products. There can be no assurance that the Company will be successful in forming such alliances or that the Company's partners would devote adequate resources to, and successfully market, the Company's products. If the Company instead performs such tasks itself, it will be required to develop expertise internally or contract with third parties to perform these tasks. This will place increased demands on the Company's resources, requiring the addition of new management personnel and the development of additional expertise by existing management personnel. The failure to acquire such services or to develop such expertise could materially adversely affect prospects for the Company's success. All of the Company's scientific and clinical advisors are employed by others and may have commitments to or consulting or advisory contracts with other entities that may limit their availability to the Company. Reliance on Patents and Other Proprietary Rights -- The pharmaceutical industry places considerable importance on obtaining patent and trade secret protection for new technologies, products and processes. The Company's success will depend, in part, on its ability to obtain protection for its products and technologies under United States and foreign patent laws and other intellectual property laws, to preserve its trade secrets and to operate without infringing the proprietary rights of third parties. There can be no assurance that the research conducted by or on behalf of the Company will result in any patentable technology or products. Even if patents are obtainable, the procedure for obtaining patents is expensive, time consuming and can be subject to lengthy litigation. Moreover, it is possible, with respect to some patentable items, that the Company may conclude that better protection would be afforded by not seeking patents. Although the Company has endeavored and will continue to endeavor to prevent disclosure of any confidential information by adopting a policy to bind its scientific advisors and scientific and management employees and consultants by confidentiality agreements, there can be no assurance that such information will not be wrongfully disclosed. Any such disclosure would likely have an adverse effect on the Company. The Company currently has two patents issued and four patent applications pending in the United States and foreign countries. Although the Company intends to apply for additional patents, there can be no assurance that the Company will obtain patents either under the pending applications or any future applications or that any of its existing or any future patent will provide effective protection against competitive products. If patent or other proprietary rights cannot be obtained and maintained by the Company, its products may face significantly increased competition. The application of patent law to the area of biotechnology is relatively new and has resulted in considerable litigation. The ability of the Company to obtain patents, licenses and similar rights and the nature, extent and enforceability of the intellectual property rights, if any, that are obtained as a result of its research programs involve complex legal and factual issues. The issues are more significant with respect to any product based upon natural substances, for which available patent protection may be limited due to the prior use or reported utility of such products (or their natural sources) to treat various disorders or diseases. There can be no assurance as to the degree of protection that proprietary rights, when and if established, will afford the Company. To the extent that the Company relies on trade secret protection and confidentiality agreements to protect technology, there can be no assurance that others will not independently develop similar technology, or otherwise obtain access to the Company's findings or research materials embodying those findings. There is also a substantial risk in the rapidly developing biotechnology industry that patents and other intellectual property rights held by the Company could be infringed by others or that products developed by the Company or their method of manufacture could be covered by patents owned by other companies. To the extent that any infringement should occur with respect to any patents issued to the Company or licenses granted to the Company, or if the Company is alleged to have infringed on patents or licenses held by others, the Company could be faced with the expensive prospect of litigating such claims; if the Company were to have insufficient funds on hand to finance its litigation, it might be forced to negotiate a license with such other parties or to otherwise resolve such a dispute on terms less favorable to the Company than could result from successful litigation. Uncertainty of Clinical Trials and Results -- The results of clinical trial and preclinical testing for the Company's products are subject to varying interpretations. Furthermore, studies conducted with alternative designs or on alternative populations could produce results that vary from those expected. Therefore, there can be no assurance that the results or the Company's interpretation of them will be accepted by governmental regulators or the medical community. Even if the development of the Company's products in the preclinical phase advances to the clinical stage, there can be no assurance that they will prove to be safe and effective. The products that are successfully developed, if any, will be subject to requisite regulatory approval prior to their commercial sale, and the approval, if obtainable, may take several years. Generally, only a very small percentage of the number of new pharmaceutical products initially developed is approved for sale. Even if they are approved for sale, there can be no assurance that they will be commercially successful. The Company may encounter unanticipated problems relating to development, manufacturing, distribution and marketing, some of which may be beyond the Company's financial and technical capacity to solve. The failure to address such problems adequately could have a material adverse effect on the Company's business, financial condition or results of operations. No assurance can be given that the Company will succeed in the development and marketing of any new drug products, or that they will not be rendered obsolete by products of competitors. Uncertainty of Health Care Reform Measures -- Federal, state and local officials and legislators (and certain foreign government officials and legislators) have proposed or are reportedly considering proposing a variety of reforms to the health care systems in the United States and abroad. The Company cannot predict what health care reform legislation, if any, will be enacted in the United States or elsewhere. Significant changes in the health care system in the United States or elsewhere are likely to have a substantial impact over time on the manner in which the Company conducts its business. Such proposals and changes could have a material adverse effect on the Company's ability to raise capital. Furthermore, the Company's ability to commercialize its potential products may be adversely affected to the extent that such proposals have a material adverse effect on the business, financial condition and profitability of other companies that are prospective corporate partners with respect to certain of the Company's proposed products. Uncertain Extent of Price Flexibility and Third-Party Reimbursement -- The Company's ability to commercialize its products successfully will depend in part on the extent to which appropriate reimbursement levels for the cost of such products and related treatment are obtained from government authorities, private health insurers and other organizations, such as health maintenance organizations ("HMOs"). Third party payers are increasingly challenging the prices charged for medical products and services. Also, the trend towards managed health care in the United States and the concurrent growth of organizations such as HMOs, which could control or significantly influence the purchase of health care services and products, as well as legislative proposals to reduce government insurance programs, may all result in lower prices for the Company's products. The cost containment measures that health care providers are instituting could affect the Company's ability to sell its products and may have a material adverse effect on the Company. Government Regulation; Need for FDA and Other Regulatory Approval -- Prior to marketing, each of the Company's products must undergo an extensive regulatory approval process conducted by the FDA and applicable agencies in other countries. The process, which focuses on safety and efficacy and includes a review by the FDA of preclinical testing and clinical trials and investigating as to whether good laboratory and clinical practices were maintained during testing, takes many years and requires the expenditure of substantial resources. The Company is, and will be dependent on the external laboratories and medical institutions conducting its preclinical testing and clinical trials to maintain both good laboratory practices established by the FDA and good clinical practices. Data obtained from preclinical and clinical testing are subject to varying interpretations which could delay, limit or prevent regulatory approval. In addition, delays or rejection may be encountered based upon changes in FDA policy for drug approval during the period of development and by the requirement for regulatory review of each submitted Product License Approval or New Drug Application. There can be no assurance that, even after such time and expenditures, regulatory approval will be obtained for any of the Company's product candidates. Moreover, such approval may entail significant limitations on the indicated uses for which a drug may be marketed. Even if such regulatory approval is obtained, a marketed therapeutic product and its manufacturer are subject to continual regulatory review, and later discovery of previously unknown problems with a product or manufacturer may result in restrictions on such product or manufacturing, including withdrawal of such product from the market. Change in the manufacturing procedures used by the Company for any of the Company's approved drugs are subject to FDA review, which could have an adverse effect upon the Company's ability to continue the commercialization or sale of a drug. The process of obtaining FDA and foreign regulatory approval is costly and time consuming, and there can be no assurance that any product that the Company may develop will be deemed to be safe and effective by the FDA. The Company will not be permitted to market any product it may develop in any jurisdiction in which the product does not receive regulatory approval. The Company is also subject to various foreign, federal, state and local laws regulations and recommendations (collectively "Governmental Regulations") relating to safe working conditions, laboratory and manufacturing practices, the experimental use of animals and the use, manufacture, storage, handling and disposal of hazardous or potentially hazardous substances, including radioactive compounds and infectious disease agents, used in connection with the Company's research and development work and manufacturing processes. Included in this area is Good Manufacturing Practices ("GMP") compliance and its European equivalent, ISO 9000, a measure of quality control and assurance. The Company's manufacturing activities for preclinical and clinical supplies are not fully in GMP compliance, although the Company expects to reach full compliance in the near future. There can be no assurance that the Company will achieve GMP compliance. Although the Company believes it is in compliance with Governmental Regulations in all material respects, there can be no assurance that the Company will not be required to incur significant costs to comply with Governmental Regulations in the future. Competition; Technological Change -- There is substantial competition in the pharmaceutical field in general and in vaccine development and liposomal formulation in particular. The Company's competitors include companies with financial resources, and licensing, research and development staffs and facilities substantially greater than those of the Company. Competitors in the vaccine development field include major pharmaceutical companies, specialized biotechnology firms, universities and governmental agencies, including American Home Products, the Merck Company, SmithKline Beecham, MedImmune, Aviron and Chiron. Competitors in the liposomal formulation field include The Liposome Company, NexStar and Sequus. A competitor in the field of oral delivery of drugs is Emisphere which is currently in Phase I trials for oral heparin and in pre-clinical development with an oral human growth hormone. Many competitors have greater experience than the Company in undertaking preclinical testing and clinical trials and obtaining FDA and other regulatory approvals. There can be no assurance that the Company's competitors will not succeed in developing similar technologies and products more rapidly than the Company and that these technologies and products will not be more effective than any of those that are being or will be developed by the Company, or that such competitors' technologies and products will not render the Company's technologies and products obsolete or noncompetitive. Manufacturing and Marketing Capabilities -- The Company does not now have and probably will not have in the foreseeable future, the resources to manufacture or directly market on a large commercial scale any products which it may develop. In connection with the Company's research and development activities, it will seek to enter into collaborative arrangements with pharmaceutical companies to assist in funding development costs, including the costs of clinical testing necessary to obtain regulatory approvals. It is expected that these entities will also be responsible for commercial scale manufacturing which must be in compliance with applicable FDA regulations. The Company anticipates that such arrangements may involve the grant by the Company of the exclusive or semi- exclusive right to sell specific products to specified market segments in particular geographic territories in exchange for a royalty, joint venture, future co-marketing or other financial interest. The Company believes that these arrangements will be more effective in promoting and distributing therapeutic products in the United States in view of the Company's limited resources and the extensive marketing networks and large advertising budgets of large pharmaceutical companies. To date, the Company has not entered into any collaborative agreements or distributorship arrangements for any of its proposed products and there can be no assurance that the Company will be able to enter into any such arrangements on favorable terms or at all. The Company may ultimately determine to establish its own manufacturing and/or marketing capability, at least for certain products, in which case it will require substantial additional funds and personnel. Use of Hazardous Materials; Environmental Matters -- The Company's research and development involves the controlled use of small quantities of hazardous materials, chemicals and various radioactive compounds. Although the Company believes that its safety procedures for handling and disposing of such materials comply with the standards prescribed by federal, state and local regulations, the risk of accidental contamination or injury from these materials cannot be eliminated. In the event of such an accident, the Company could be held liable for any resulting damages, and any such liability could exceed the resources of the Company. There can be no assurance that the Company will not be required to incur significant costs to comply with environmental laws and regulations in the future, nor that the operations, business or assets of the Company will not be materially adversely effected by current or future environmental laws or regulations. Product Liability Exposure; Limited Insurance Coverage -- The testing and marketing of pharmaceutical products entails an inherent risk of exposure to product liability claims from adverse effects of products. The Company has obtained liability insurance with limits of liability of $1,000,000 for each claim and $3,000,000 in the aggregate. There is no assurance that current or future policy limits will be sufficient to cover all possible liabilities. Further, there can be no assurance that adequate product liability insurance will continue to be available in the future or that it can be maintained at reasonable costs to the Company. In the event of a successful product liability claim against the Company, lack or insufficiency of insurance coverage could have an adverse effect on the Company. Dependence on Key Personnel and Scientific Advisors; Evolution of Management -- The Company is dependent on the principal members of its management and scientific staff, the loss of whose services could impede the achievement of development objectives. Furthermore, as the Company's focus evolves, the Company's need for certain skills may diminish and the need for other skills may arise. Thus, recruiting and retaining qualified scientific personnel to perform research and development work in the future will also be critical to the Company's success and may lead to further evolution of the Company's management. Although the Company believes it will be successful in attracting and retaining skilled and experienced scientific personnel, there can be no assurance that the Company will be able to attract and retain such personnel on acceptable terms given the competition among numerous pharmaceutical and health care companies, universities and non-profit research institutions for experienced scientists and managers. The Company's scientific advisors are employed on a full-time basis by unrelated employers and some have one or more consulting or other advisory arrangements with other entities which at times may conflict with their obligations to the Company. Inventions or processes discovered by such persons, other than those to which the Company's licenses relate, or those for which the Company is able to acquire licenses or those which were invented while performing consulting services under contract to the Company, will most likely not become the property of the Company, but will remain the property of such persons or such persons' full-time employers. Failure to obtain needed patents, licenses or proprietary information held by others could have a material adverse effect on the Company's business, financial condition or results of operations. Limited Personnel; Dependence on Contractors -- The Company has twelve full- time and one part-time employee. With these exceptions, the Company relies, and for the foreseeable future will rely, on certain independent organizations, advisors and consultants to provide certain services with regard to clinical research. There can be no assurance that their services will continue to be available to the Company on a timely basis when needed, or that the Company could find qualified replacements. The Company's advisors and consultants generally sign agreements that provide for confidentiality of the Company's proprietary information. However, there can be no assurance that the Company will be able to maintain the confidentiality of the Company's technology, the dissemination of which could have a material adverse effect on the Company's business, financial condition or results of operations. See "Reliance on Patents and Other Proprietary Rights." Conducting Business Abroad -- Although the Company currently does not conduct business outside the United States, it is in discussions with potential strategic partners for the in-licensing and out-licensing of technology and the development and marketing of its products. No assurance can be given that the Company will be able to establish arrangements covering foreign countries, that the necessary foreign regulatory approvals for its product candidates will be obtained, that foreign patent coverage will be available or that the development and marketing of its products through such licenses, joint ventures or other arrangements will be commercially successful. The Company might also have greater difficulty obtaining proprietary protection for its products and technologies outside the United States rather than in it, and enforcing its rights in foreign courts rather than in United States courts. Limited Availability of Net Operating Loss Carry Forwards -- For Federal income tax purposes, net operating loss and tax credit carryforwards as of December 31, 1996 are approximately $1,929,000 and $260,000, respectively. These carryforwards will expire beginning in 2003 through 2010 . The Tax Reform Act of 1986 provided for a limitation on the use of net operating loss and tax credit carryforwards following certain ownership changes. The Company believes that its proposed private placement, together with certain prior issuance's of Common Stock, is likely to severely restrict the Company's ability to utilize its net operating losses and tax credits. Additionally, because U.S. tax laws limit the time during which net operating loss and tax credit carryforwards may be applied against future taxable income tax liabilities, the Company may not be able to fully utilize its net operating loss and tax credits for federal income tax purposes. Potential Volatility of Price; Low Trading Volume -- The market price of the Common Stock, like that of many other development-stage public pharmaceutical or biotechnology companies, has been highly volatile and may be in the future. Factors such as announcements of technological innovations or new commercial products by the Company or its competitors, disclosure of results of preclinical and clinical testing, adverse reactions to products, governmental regulation and approvals, developments in patent or other proprietary rights, public or regulatory agency concerns as to the safety of products developed by the Company and general market conditions may have a significant effect on the market price of the Common Stock and its other equity securities. In addition, in general, the Common Stock has been thinly traded on the Bulletin Board, which may affect the ability of the Company's stockholders to sell shares of the Common Stock in the public market. There can be no assurance that a more active trading market will develop in the future. Certain Interlocking Relationships; Potential Conflicts of Interest. Steve H. Kanzer, C.P.A., Esq., a director of the Company, is a Senior Managing Director of the Placement Agent. Paramount Capital Asset Management, Inc. ("PCAM") is the investment manager and general partner of The Aries Fund and the Aries Domestic Fund, L.P., respectively. Lindsay A. Rosenwald, M.D., the President and sole stockholder of PCAM, is also the President and sole stockholder of the Placement Agent. Dr. Rosenwald is also President and sole stockholder of Paramount Capital Investment LLC, a New York-based merchant banking and venture capital firm specializing in biotechnology companies ("PCI"). In the regular course of its business, PCI identifies, evaluates and pursues investment opportunities in biomedical and pharmaceutical products, technologies and companies. Generally, Delaware corporate law requires that any transactions between the Company and any of its affiliates be on terms that, when taken as a whole, are substantially as favorable to the Company as those then reasonably obtainable from a person who is not an affiliate in an arms-length transaction. Nevertheless, neither such affiliates nor PCI is obligated pursuant to any agreement or understanding with the Company to make any additional products or technologies available to the Company, nor can there be any assurance, and the Company does not expect and purchasers of the securities offered hereby should not expect, that any biomedical or pharmaceutical product or technology identified by such affiliates or PCI in the future will be made available to the Company. In addition, certain of the current officers and directors of the Company or certain of any officers or directors of the company hereafter appointed may from time to time serve as officers or directors of other biopharmaceutical or biotechnology companies. There can be no assurance that such other companies will not have interests in conflict with those of the Company. Concentration of Ownership and Control. The Company's directors, executive officers and principal stockholders and certain of their affiliates have the ability to influence the election of the Company's directors and most other stockholder actions. In particular, pursuant to the Placement Agency Agreement, so long as 50% of the Placement Shares remain outstanding and subject contractual rights described in the Subscription Agreement between the Company and each signatory thereto (the "Subscription Agreements"), the Company may not do any of the following without the Placement Agent's prior approval: (i) issue or increase the authorized amount or alter the terms of any securities of the Company senior to, or on parity with, the Placement Shares with respect to voting, liquidation or dividends, (ii) alter the Company's charter documents in any manner that would adversely affect the relative rights, preferences, qualifications, limitations or restrictions of the Placement Shares or of certain contractual rights described in the Subscription Agreements, (iii) incur indebtedness in excess of $1,000,000, (iv) incorporate or acquire any subsidiaries and (v) enter any transactions with affiliates of the Company. In addition, the Company's Board of Directors cannot exceed seven persons without the prior written consent of the Placement Agent. These arrangements may discourage or prevent any proposed takeover of the Company, including transactions in which stockholders might otherwise receive a premium for their shares over the then current market prices. Such stockholders may influence corporate actions, including influencing elections of directors and significant corporate events. See also, "--Certain Interlocking Relationships; Potential Conflicts of Interest." -----END PRIVACY-ENHANCED MESSAGE-----